Alexander Addresses Device Tax Frustrations

By Bill Dries

When U.S. Sen. Lamar Alexander came to Bartlett in March to talk with leaders of several local biotech companies, he had a specific issue in mind – the medical device tax that is part of the Affordable Care Act, also known as Obamacare.

By his tally, the tax takes $30 billion and 33,000 jobs from the medical device industry through raising the price of the devices and discouraging innovation. Because of this, Alexander is a co-sponsor of legislation that would repeal the 2.3 percent excise tax.

ALEXANDER

“Anytime you put a 2.3 percent tax on the revenues of an industry that absorbs $30 billion out of the economy, you’re going to destroy jobs,” he said before the session. “You are not going to create more jobs.”

The theory behind the tax is that the Affordable Care Act will cause a jump in new patient sales of the devices, which will offset the tax. The tax revenues are used to subsidize in part insurance coverage.

Alexander, who called the tax “onerous,” also heard from venture capital firms and smaller device companies that the Food and Drug Administration poses bureaucratic barriers and delays that can be fatal to the smaller ventures in the broader market.

Ed Chin, senior director of regulatory affairs for Medtronic, estimated a $120 million impact on the company from the device tax.

“Had that not occurred, we would be investing that,” he told Alexander.

Meanwhile, Chin gave the FDA credit for some improvements in the time it takes to get a product approved for the medical market.

But Alexander heard more from the panel about bureaucratic barriers at the FDA than he did about the device tax.

Steve Bares of the Memphis Bioworks Foundation said the foundation is working with 20 device companies at various stages of business development in an environment where it is hard to raise capital. And he said the tax has an impact on that.

“Because it’s on revenue, all that does from a venture capital perspective is raise the risk of the deal, which makes it harder to raise the money,” he said. “It’s not rocket science.”

Bares also said those companies have to raise more money simply to deal with the regulatory environment

An example is Restore Medical, whose CEO, Ryan Ramkhelawan, worked in his garage on a sterilization tray system that handles the cleaning and sterilization of surgical instruments more rapidly.

“I had no idea what I was up against,” Ramkhelawan told Alexander of the process that followed his development of the prototype at a time when he and his investors could have used some guidance from regulators.

“We ended up picking a (validation) lab that sounded great, but after we really got product there and got ready to do our study, we started learning that they really didn’t know what we were talking about,” he said. “Every day that goes by, we are burning through our cash. We ended up having to make a decision to literally fly over there and confiscate our trays and find another laboratory and fly across the country and physically take it there and stay there and make sure it was done right.”

Robert Bean, president of CEO of Transnetyx, expressed frustration about the kinds of tests the FDA might require and standards for those tests depending on whether the product goes to a doctor or directly to consumers.

“If you have a device and you’re going to build a box and you take that box to the doctor, it goes through regulatory,” he said. “But if you’re a clinical lab, how they regulate the test and what kind of test it is, is vague. We’ve been hearing for three years that the agency is going to give guidance on that. Crickets. Crickets. We have no idea.”

Cordova-based Transnetyx is developing automatic genetic testing that it would like to sell directly to consumers.

He used the example of a patient taking Plavix, which isn’t effective in some patients because of genetic factors. He said most doctors won’t tell their patients that. But, he added, there is a simple cheek swab test for which the FDA won’t grant direct consumer approval.

“Using a test we do now with physicians … the answer was no,” he said. “And the reason it was no is because it was too politically controversial for the cardiologists who haven’t quite made up their mind whether they think the drug working or not working is important,” Bean added.

Bares referred to an “uncertain and difficult regulatory environment” and turnover among key FDA personnel who are involved in the decisions about trials and tests.

“That turnover and change can mean you go and you get a plan, and a year later you give another plan – a year later, another plan,” he said. “Because of the cost of that, that can break a small company.”